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SEC Chief Rips Huge Grasso Pay Package

September 03, 2003|Walter Hamilton and Kathy M. Kristof | Times Staff Writers

NEW YORK — The New York Stock Exchange, which is cracking down on abusive corporate practices, was itself chided by the nation's top securities regulator Tuesday, for awarding its chairman a pay package of more than $140 million this year.

In a sharply worded letter, Securities and Exchange Commission Chairman William Donaldson questioned the compensation paid to Richard Grasso, the NYSE's high-profile chairman. Donaldson, who preceded Grasso as the head of the world's largest stock exchange, demanded that the NYSE provide "full and complete" information about Grasso's compensation and how it was arrived at by Sept. 9.

The letter came amid intensifying criticism of the exchange's policies for compensating executives and choosing board members. Outsiders accuse the NYSE of indulging in some of the dubious habits that it supposedly is trying to eradicate at the blue-chip companies it regulates.

"The approval of Mr. Grasso's pay package raises serious questions regarding the effectiveness of the NYSE's current governance structure," Donaldson wrote to H. Carl McCall, the head of the exchange's compensation committee.

Among Donaldson's questions was whether the large payout would compromise the exchange's ability to regulate Wall Street investment banks, which themselves are under heavy scrutiny for a welter of bull-market misdeeds. Donaldson asked for extensive details, including information on whether any members of the compensation committee had conflicts of interest, such as business dealings with Grasso.

The NYSE issued a one-sentence statement promising to give the SEC more details.

"Mr. McCall is in receipt of Mr. Donaldson's letter requesting additional information, and he will respond by the Sept. 9 date," the exchange said.

An NYSE spokesman declined to comment. McCall didn't return calls seeking comment.

The NYSE disclosed last week that it made lump-sum payments of $139.5 million to Grasso to cover retirement benefits and incentive awards that he previously had earned but deferred taking. In addition to its size, several aspects of the payout startled critics. Unlike large pay packages for corporate chief executives, which frequently include stock or options and entail at least some risk that the benefits won't be paid, Grasso was paid entirely in cash.

Critics also noted that it was rare for executives to receive such retirement payouts while still in their jobs.

The exchange also announced last week that it extended Grasso's contract by two years through mid-2007, paying him $1.4 million a year and guaranteeing annual bonuses of at least $1 million.

It was the first time the NYSE had revealed how much it paid its top executive, and followed reports that Grasso's pay far exceeded that of other securities regulators. For example, Donaldson earns $142,500 a year as SEC chief.

A Donaldson aide said she didn't know how much Donaldson was paid when he ran the NYSE from 1991 to 1995 but stressed that Donaldson, himself a former Wall Street CEO, took a lower salary to come to the NYSE.

"He viewed taking the job as a public service, and he expected to, and did, take a substantial pay cut," said Laura Cox, a senior advisor to Donaldson.

Grasso, 57, once worked for Donaldson at the NYSE. Grasso had hoped to become NYSE chief when John Phelan retired as its chairman in 1990. But some board members, fearing Grasso lacked the necessary experience, installed Donaldson. Grasso rose to the top position when Donaldson left in 1995.

Donaldson's own pay has been criticized in the past. Indeed, during his brief tenure at Aetna Inc., the big national insurance firm, Donaldson earned more than $18 million for a 10-month stint as CEO. While Aetna defended the pay, saying that the company was undergoing a major transition and Donaldson's pay was tied to performance, some critics contended it was outrageous.

The criticism of Grasso's pay stems in part from the NYSE's unique position. Officially, the exchange is a membership organization composed of hundreds of Wall Street firms and its job is to facilitate stock trading.

But it serves a dual role by also functioning as a securities regulatory agency that polices the brokerage industry and reports to the SEC. As such, many argue that the salaries of NYSE executives should match those of government employees rather than Wall Street titans.

"That is an enormous sum by any standard, especially for someone" who is running what is akin to a public utility, said a source close to Donaldson.

It's unclear whether the SEC would order changes to Grasso's pay. Though it has oversight of self-regulatory organizations such as the NYSE, the SEC historically has not dictated pay levels, said an SEC insider. By releasing his letter, Donaldson may simply be trying to use his bully pulpit to let the exchange know he thinks Grasso's salary is too high, the person said.

NYSE board members have stressed that Grasso has done a good job since becoming chairman in 1995 and that they had to link his pay to that of CEOs at major securities firms.

Earlier this year, Donaldson asked the NYSE to analyze its corporate governance policies and report back to him. In his letter, Donaldson said he was "especially concerned" that the exchange extended Grasso's pay deal before submitting its final report, which is expected this year.

"To enter into a contract that goes to 2007 before the NYSE overhaul of their corporate governance is underway sends a strong message that they are not serious about this overhaul," said Nell Minow, editor of a corporate governance Web site called the Corporate Library. "It undermines the credibility of any reform effort."

Hamilton reported from New York, Kristof from Los Angeles.

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